Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Cadre Holdings' (NYSE:CDRE) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Cadre Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = US$71m ÷ (US$621m - US$93m) (Based on the trailing twelve months to June 2024).

Therefore, Cadre Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Aerospace & Defense industry.

Above you can see how the current ROCE for Cadre Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cadre Holdings for free.

What Can We Tell From Cadre Holdings' ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last four years, and the capital employed within the business has risen 127% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Cadre Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Cadre Holdings' ROCE

In the end, Cadre Holdings has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 137% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Cadre Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Cadre Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.